Infosys shares were up nearly 1% to $14.78 in U.S. trading Monday. In recent trading, the iShares MSCI India exchange-traded fund (INDA) was up 0.3%, and the Emerging Markets Internet & Ecommerce ETF (EMQQ) was up 0.6%.

The Goldman’ 12-month price target, at $12.88 for ADRs and 799 rupees for the India-traded shares, is below the current price. But analysts Sumeet X Jain and Saurabh Thadani indicate that things might not get much worse. They remain neutral on the stock, but that’s an upgrade from sell. The action removes Infosys from Goldman’s Asia-Pacific sell list. The analysts write in a report dated Sept. 17:

“With Infosys stock down 7% and India’s Sensex index flat in the last month, the stock is now trading on 2.7X FY1 price/book – a 10-year low. We believe the de-rating was led by uncertainty on strategic direction post the CEO/board member departures mid-August and concerns that INFY could cut annual growth guidance. While we expect sales/margin pressure to persist, with 12% implied downside to our 12-month target price vs. coverage average of -6% and the shares trading in line with peers, the risks look largely priced in and we upgrade INFY to Neutral from Sell. Since being added to our Sell List on March 2, 2017, INFY is -11% vs. Sensex +12% (ADR -4% vs. S&P 500 +5%).”

With “some margin stability” due to growth in app service business, pricing growth and better “employee utilization,” They think the following headwinds at the industry and company levels are largely priced in:

1) Shrinkage of app services revenue as Infosys’ legacy IT services face pressure from cloud-based SaaS solutions;
2) Demand in key financial and retail verticals face structural headwinds, with retail market share shifts to Amazon.com (AMZN);
3) Margin and utilization pressure due to U.S. expansion, with 10,000 local hires planned in the next two years and 1,200 hired to date);
4) Strategy uncertainty given the pending appointment of a permanent CEO.

With uncertainty surrounding the executive shuffle at Infosys (INFY and 500209.India), the company announced what seemed like a no-brainer for investor participation: a share buyback at a 25% premium to the current price.

As I noted in my column last week, 3 Catalysts for Infosys Stock, the share buyback could lift shares. But Infosys stock slipped another 2% this week to $14.84 in U.S. trading, while rising 1.2% on the week to 919.5 rupees in trading in monsoon-flooded Mumbai. The iShares MSCI India exchange-traded fund (INDA) rose 1.3% on the week, and the WisdomTree India Earnings Fund (EPI) rose 1.5%.

The buyback plan was announced Aug. 19, one day after CEO Vishal Sikka resigned. It calls for the company purchase of 113 million shares at a price of 1,150 rupees, which is 25% above the current price. We wrote to Reliance Securities Analyst Harit Shah, based in Mumbai, who provided a report with more analysis on the buyback, and how individual investors should be thinking about the buyback. He writes:

” … This will lead to a cash outflow of Rs130 billion ($2 billion), which is ~39% of the IT major’s cash balance. In our view, the buyback proposal is attractive for retail investors with holdings up to Rs0.2 million. As per Securities and Excange Board of India (SEBI) regulations, 15% of the buyback is reserved for this category of investors, which implies that ~17 million shares in the buyback will be reserved for them. Assuming 100% of these shareholders tender their shares, the acceptance ratio will be ~59% (total holding of ~28.7 million shares). As acceptance ratio increases, individual/retail investors who tender their shares will earn more profit, ranging from Rs16,000-22,000 (19-25%), assuming the buying price is the current market price and investors sell their remaining shares at the current market price.”

At this point, U.S. investors may be wondering if the above applies to them. Shah explained the following to Barron’s:

“U.S. shareholders (ADR holders) can participate, though the process may be a bit more elaborate as they have to go through the custodian banks.”

Infosys says in a PDF explaining the buyback that U.S. and India securities regulations conflict, and that means that the buyback requires that holders of American Depositary Shares (ADSs) can participate if they “cancel ADSs and withdraw the underlying equity shares to become equity shareholders of the company as on the record date.”

As if that’s not complicated enough, the buyback must still meet shareholder approval, “through postal ballot,” and the politically fraught board has formed a buyback committee, to expedite the process and establish a timeline. Buyback committee members include just-resigned former CEO Sikka and interim CEO U.B. Pravin Rao. Meanwhile non-executive Chairman Nandan Nilekani, an Infosys co-founder, said the company will consider insiders for the vacant CEO position.

Infosys (500209.India and INFY) alumni will be considered for the vacant CEO position, Chairman Nandan Nilekani said Aug. 25, and that is causing a lot of speculation.

Indian media have speculated about four potential candidates: Ashok Vemuri, the former Americas head and board member; V Balakrishnan, the former chief financial officer; Mohandas Pai, former CFO and human resources head), and BG Srinivasm a former president. William Blair analysts Anil Doradla and Maggie Nolan explain why Vemuri is a desirable candidate:

” … we strongly believe Ashok Vemuri would be the ideal candidate. Our opinion is based on three key attributes that are lacking in the other candidates. First, he has had a successful track record at Infosys when he ran North America and was even viewed as a potential CEO candidate of Infosys before his departure. Furthermore, given the North American market being the most important for Infosys, an operational knowledge would be a plus. Second, since his departure from Infosys, Mr. Vemuri has gained a reputation being a turn-around specialist. As the CEO of iGATE (which we covered before it was taken over by Capgemini), we believe he did a commendable job streamlining the company’s operations after the not-so-successful acquisition of India-based Patni in 2011. Additionally, based on our recent industry interactions, we believe he is aggressively taking the right steps at Conduent toward profitability and growth. To some extent, we believe he is at the CEO role at Conduent due to his reputation of handling difficult situations. And third, Mr. Vemuri has a built a good reputation among the U.S. investor community as a CEO of two public companies, and he has a track record of performing. To a large extent, this is an area that Infosys has lacked, and bringing in an individual such as Mr. Vemuri will result in investors being willing to take a fresh look at the story …”‘

Aberdeen Standard Investment’s India Fund (IFN) rose 0.8% Wednesday, outpacing the 0.4% rise in the iShares MSCI India exchange-traded fund (INDA). Infosys shares are down 0.7% in U.S. trading this week, including a 1.4% slump today, despite an upgrade to Buy from Axis Capital. Analysts there raised their price target 14% to 1,138 Indian rupees. The target implies nearly 23% upside to the stock’s most recent close of 926.65 rupees.

In U.S. trading, the stock had moved higher this week. But with today’s decline, it’s down 0.7% since Barron’s published a positive column on the shares. Subscribers can read the article: 3 Catalysts For Infosys Stock.

The iShares MSCI Emerging Markets exchange-traded fund (EEM) was down nearly 1% in early trading with global markets on edge after North Korea’s missile launch over the Japanese island of Hokkaido.

CORRECTED: The iShares MSCI Korea ETF (EWY) was down 1.6% pre-market and fell more than 1% in early trading as did the VanEck Vectors Russia ETF (RSX). The iShares MSCI Mexico Capped ETF (EWW) was down 0.3% Tuesday after a 1.7% dip Monday.

Some upgrades and downgrades in emerging markets:

Deutsche Bank raised its rating on Infosys (INFY) to Buy From Hold. Infosys shares were down 1.6% pre-market and shares were off 0.6% in early trading.

Bank of America Merrill Lynch cut Cemex (CX) to Neutral From Buy. Cemex shares were off by 0.2% pre-market and fell 1.5% in early trading.

Brazil’s state-run oil producer and refiner Petroleo Brasileiro or Petrobras (PBR) shut its Pasadena, Texas refinery due to the storm that pummeled the Gulf of Mexico coastline in Texas and Louisiana. Petrobras said Monday that it is initiating the sale of onshore exploration and production rights in three fields, totaling 50 concessions. Petrobras ADRs slipped 1% in early trading.

U.S.-traded shares of Infosys (INFY) were up 0.8% Friday after Nandan Nilekani, one of the company’s seven founders and a former CEO, was named non-executive chairman.

Pravin Rao remains interim CEO while the company searches for a new leader.

On a market holiday in India, the company held conference calls Friday and announced the latest in a management shakeup, which includes the resignation Thursday of the board co-chairman and three members. That paves the way for acrimonious founders to push their agenda. Infosys shares are down 5% over the past week since the resignation of CEO Vishal Sikka, the first non-founder in the leadership spot. The iShares MSCI India exchange-traded fund (INDA) is up 1.2% in the same time period.

Nilekani, 62, stepped down from the board in 2009 for political work and headed the authority responsible for India’s biometric identification initiative, Cowen analysts Bryan C. Bergin and Avishai Kantor note, adding:

Interim Chairman Nikekani’s tenure “does not have a formal timeline and is intended to be as long as necessary to ensure INFY’s CEO search is completed, Board is reconstituted and the business is stabilized. These actions aim to reduce the meaningful public distractions driven by co-founder Murthy’s scrutiny of the board’s corporate governance issues. However, the upheaval in INFY’s leadership raises execution risk, in our view, with ongoing distractions to its workforce and meaningful uncertainty for clients, which INFY’s competitors are no doubt taking advantage of. Uncertainty surrounding INFY’s strategy is the key unknown as it has already been attempting to pivot its business from legacy to new/digital services. Mr. Nilekani expects to direct a team to complete a strategic review of the company’s ongoing initiatives. We expect shares to remain range bound until strategy update and next steps are communicated in conjunction with F2Q17.”

The company attempted to shore up the stock with a share buyback plan after CEO Vishal Sikka resigned last week, but investors seem more fixated on news that divisive Infosys co-founder Narayana Murthy will speak to shareholders Wednesday. He claims lapses in corporate governance standards have hurt the company. Infosys paid a $1 million New York legal settlement in June, without admitting fault, on allegations that it failed to adequately compensate hundreds of workers, avoided taxes and broke U.S. visa rules.

The Infosys board holds Murthy responsible for Sikka’s exit through a “continuous assault” with “factually inaccurate” and “already-disproved rumours,” India’s Economic Times reports. Former Infosys CFO V. Balakrishnan said Tuesday that the board is pointing to Murthy’s flaws to cover its own failures, and said public criticism of the co-founder is “unusual and strange.” He thinks the board needs a shakeup if a business restructuring is to take root.

As for the share buyback, India’s Livemint notes that when Tata Consultancy Services (532540.IN) bought back shares, small investors didn’t tender their shares, which “resulted in a bonanza for all who did.” Livemint adds:

The Infosys “buyback offers a decent arbitrage opportunity to small shareholders. The buyback price of Rs1,150 is at a huge premium of 32% to the current price, and those who fall in the ‘small shareholders’ category can buy at current levels and sell around 60% of their holdings in the buyback. Even if Infosys shares halve from current levels, such shareholders will only make marginal losses on the entire trading position. On the other hand, if the stock remains where it is, they can end up with returns of around 18% over the next three to four months …”

Shares of India’s information tech giant Infosys (INFY) are down another 2% today as the investment continues to reel from the CEO’s resignation.

The iShares MSCI India exchange-traded fund (INDA) was down 0.9% in recent trading.

Infosys stock tumbled 7% Friday after CEO Vishal Sikka resigned. In his resignation latter, he revealed that infighting and global difficulties forced his hand. But he cited President Donald J. Trump’s policies, including threats to U.S. visa policies for Indian workers, as unexpected headwinds.

A number of analysts have downgraded Infosys stock. Here’s a partial list including some analysts in India, from a McClatchy Tribune news item via FactSet:

J.P. Morgan downgraded Infosys to neutral from overweight and cut its target price to 905 rupees from 1,075 rupees.IDFC Securities downgraded Infosys to neutral from outperform and lowered target price to 990 rupees from 1,150.ICICI Securities downgraded Infosys to add from buy and lowered its target to Rs970 from Rs1,124.CIMB cut its rating to hold and lowered its target Rs975 from Rs1165.Equirus Securities has downgraded Infosys to reduce from buy and lowered its target price to Rs919 from Rs1,116 a piece.

The blunt, emotional resignation letter by Infosys (INFY) CEO Vishal Sikka cites the difficulties the information technology consulting company has faced in doing business in the United States while addressing significant internal conflicts.

Infosys shares had slumped 7.7% in recent U.S. trading, while the iShares MSCI India exchange-traded fund (INDA) was up 0.5%

Chief operating officer U B Pravin Rao was named interim CEO until a new CEO is named. Sikka will serve as executive vice chairman and will work on large client relationships and strategy until a replacement is announced; that is expected by March 31, 2018. Cowen analysts Bryan C. Bergin and Avishai Kantor note the CEO’s resignation letter cites a breaking point from the “continuous stream of distractions and disruptions over the recent months and quarters, increasingly personal and negative as of late, as preventing management’s ability to accelerate the company’s transformation; this refers to multiple allegations and negative press over the last 4-5 quarters regarding INFY’s former CFO separation …”

Then, Infosys issued a press release responding to a letter authored by “Mr. Murthy, the founder of Infosys” and released to media outlets (not Barron’s), accusing the Infosys board and management of failing to meet corporate governance standards. One conclusion: “The board assures its shareholders, employees, customers and communities that it is committed not to be distracted by this misguided campaign.”

” … the force to automate routine [activities], even advanced activities, is an unstoppable and exponential one. And the Charlottesville incident here in the United States demonstrated once again the power of words and silences to cause real damage, or to heal. After much reflection, I have concluded that it is indeed time for me to leave my current positions as managing director and chief executive officer … I came here to help navigate the company through what I saw as a massive transformation opportunity, to transform our company and restore strong profitable growth, as well as help transform the business of our customers. … No one anticipated the additional headwinds like the geo-political disruptions (Brexit, Trump, [H1B] visa, etc) that made this transformation even more challenging, but also rewarding. But, the distractions that we have seen, the constant drumbeat of the same issues over and over again, while ignoring and undermining the good work that has been done, take the excitement and passion out of this amazing journey …”

Shares of India’s information technology giant Infosys (INFY) were up 3.7% this week, but were flat in midday U.S. trading Friday after the company reported fiscal first quarter results.

The iShares MSCI India exchange-traded fund (INDA) was up 0.6% in recent trading. Shares of other Indian IT consultancies were higher, including Wipro (WIT), up 0.6%.

The Wall Street Journal reports Infosys’ net profit rose 1.4% to 34.83 billion rupees ($540 million) in the quarter, versus 34.36 billion rupees a year ago. Revenue came in at 170.7 billion rupees, a rise of 1.8%. Ebitda margin contracted 18 basis points to 32.6% (earnings before interest, taxes, depreciation and amortization); the company maintained operating margin guidance of 23%-25% and revenue growth guidance of between 6.5% and 8.5%.

As end markets for IT services go through radical change, Infosys’ job attrition rose to 21%, versus 17.1% in the prior quarter. In addition, the company could lose skilled-worker H1-B visas in the United States as President Donald J. Trump’s administration seeks to favor U.S. workers over immigrants. Curtailing the number of H-1B visas, which exceed 65,000 annually, increasing the fees and mandating higher wages could come to pass. From WSJ, via Dow Jones Newswires:

“Infosys in May said it planned to hire some 10,000 American workers in the U.S. over the next two years, with the first of four work centers set to open next month in Indiana, where U.S. Vice President Mike Pence was governor. CEO Vishal Sikka also reiterated the company’s intention to hire 2,000 people in North Carolina in the coming years.”

A recent U.S. News & World Report story noted that the $154 billion IT services industry is India’s largest private sector employer, and it earned earned 62% of IT services export revenue in the United States in the 2016-2017 fiscal year. The story adds:

” … Sikka, the Indian-American chief executive officer of Infosys, recently told an Indian news agency that it is incorrect to assume that India’s information technology industry is dependent on H-1B visas. Still, any protectionist moves made by the U.S. or other countries will hurt India’s efforts to attract greater foreign investment, analysts say. “If the mobility of highly skilled talent is impacted, it becomes a trade issue,” says Shivendra Singh, NASSCOM’s vice president for global trade development …”

Is India’s once booming information technology sector heading for a bust?

According to reports from the BSS and AFP news services, analysts are warning that the country’s $155 billion IT industry, which employs nearly 4 million Indians, is facing massive layoffs, thanks largely to huge upheavals in India’s once flagship IT outsourcing industry.

At risk, according to the article, are hundreds of thousands of jobs, which researchers warn could disappear in the next four years as the industry’s already struggling bottom line continues to narrow.

Firms such as Infosys (INFY/500209.India), Wipro (WIT/507685.India), Tata Consultancy (532540.IN) and Tech Mahindra (532755.India) prospered for years as Western corporations moved IT operations overseas.

President Trump’s immigration maelstrom has been a big issue for India’s sizable U.S. tech community. As my colleague Dimitra DeFotis has reported frequently, woes over U.S. H-1B visas, which grant extended permission for U.S. work for highly skilled workers, have been an added burden for the already flailing industry.

As a whole, Indian IT companies earn 65% of their $155 billion revenue from the United States. And to get an idea of the importance of these stocks, Infosys, Wipro, and Tata Consultancy combined accounting for more than 12% of the assets held by the iShares MSCI India ETF (INDA).

Yesterday, Jefferies analyst Vaibhav Dhasmana argued that it’s time to sell Wipro, given the stock’s costly price tag and the company’s poor performance. Bearish calls were made weeks ago on Infosys, with William Blair downgrading the stock to a Sell back in April and Goldman Sachs launching coverage in March with its own Sell rating.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. The Barrons.com Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools.